China Stock Market Dysfunctional Amid IPO Halt, Neoh Says

By Bloomberg News -
Aug 1, 2013

China’s equity market has become
“dysfunctional” after the regulator halted share sales and
investors shifted to wealth-management products, said Anthony Neoh, a former government adviser who helped the nation open up
to foreign money managers a decade ago.

Smaller companies are losing access to capital as the China
Securities Regulatory Commission extends a more than nine-month
halt on initial public offerings and government-controlled banks
focus on lending to state-owned enterprises, said Neoh, who
helped start the Qualified Foreign Institutional Investor
program as the CSRC’s chief adviser from 1999 to 2004. Many
investors assume wealth-management products are guaranteed by
the government, creating “tremendous moral hazard,” Neoh said.

The Shanghai Composite (SHCOMP) Index tumbled 42 percent in the four
years to yesterday, the worst performance worldwide after
Greece’s ASE Index. Investors have liquidated about 2.7 million
stock accounts since June 2011 and about 116 million are empty
or frozen, regulatory data show. More than 700 companies are
waiting to raise funds, according to data compiled by Bloomberg.

“We now have a dysfunctional stock market,” Neoh, who is
now part of the CSRC’s international advisory body and a
visiting professor at the National University of Singapore, said
in an interview in Shanghai on July 30. “The stock market has
been starved for funds.”

New Lending

The Shanghai Composite gained 1.8 percent to 2,029.07 at
today’s close. The measure doubled in 10 months through August
2009 as the government poured $652 billion of stimulus into
roads, railways and housing, has lost $749 billion in market
value the past four years. The gauge dropped 12 percent this
year as Premier Li Keqiang signaled tolerance for slower growth
to shift the economy away from investment-led stimulus. The
government is targeting expansion of 7.5 percent this year,
which would be the slowest since 1990.

The economy is decelerating as the Communist Party reins in
an unprecedented $1.6 trillion lending boom in 2009 that helped
send home prices to all-time highs and left local governments
with record liabilities. New yuan bank lending was $1.3 trillion
in 2012, according to the People’s Bank of China.

Chinese stocks will eventually rally as the economy grows
at a faster pace than most major countries and regulators
increase oversight of stock sales, Mark Mobius, who oversees
about $53 billion as the executive chairman of Templeton
Emerging Markets Group, said in a July 29 interview in Bangkok.

“The IPO situation will get better in the sense that the
quality of new issues coming into the Chinese market will
improve,” Mobius said.

Ponzi Scheme

Wealth-management products, which CSRC Chairman Xiao Gang
likened to a Ponzi scheme in an October commentary, have lured
investors because they typically provide rates of return higher
than savings deposits, which are set at 3 percent annually.

The value of the products, which invest in everything from
money markets to stocks and local-government loans, surged
eightfold since 2009 to 8.2 trillion yuan ($1.3 trillion) at the
end of March, according to government data.

While they look like time deposits to investors, about 70
percent of them don’t have their principal guaranteed by banks,
according to data from the China Banking Regulatory Commission,
which requires banks to register all WMPs they sell. About half
invest in riskier areas including stocks, derivatives and loans
to local governments and property developers, the CBRC said.

“We don’t have a set of standards that are uniform for
trust companies, insurers and wealth-management firms,” said
Neoh, who was chairman of Hong Kong’s Securities and Futures
Commission from 1995 to 1998. “The implicit understanding is
that if something goes wrong, the government will come in and
protect them.”

Chief Adviser

A qualified lawyer, Neoh was invited to become the CSRC’s
chief adviser by former Premier Zhu Rongji and helped develop
the legal framework for the listing of mainland enterprises in
Hong Kong, according to a profile on the website of the
Association of Chartered Certified Accountants. He was in
Shanghai this week to speak at a finance and banking forum held
by the National University of Singapore’s business school.

Neoh oversaw the creation of the QFII program that grants
international institutions access to Chinese securities. Some
229 foreign firms have been approved to invest $43.46 billion in
yuan-denominated stocks and bonds, CSRC data show.

China needs to improve its oversight of capital flows after
$2.7 trillion in unexplained funds moved overseas in the past
decade, Neoh said, citing November data from Integrity
International. Those funds fueled property bubbles in cities
such as Hong Kong instead of being invested in domestic assets,
he said.

“Public policies we have been pursuing have created
conflicts with each other which meant one particular sector has
been disregarded,” Neoh said. “It’s actually not because of a
lack of reforms. There have been a lot of reforms. It’s because
of mismatches between a lot of these reforms.”